New Reasons for Slow Refi's; Regulators Lacking Manpower; MISMO back to MBA

By: Rob Chrisman •

Have you ever heard of the Federal Financial Institutions Examination Council? I must admit that I hadn't, until it released its latest report which includes statistics on the number of active, licensed mortgage lenders. To no one's surprise the number is down for the fourth year in a row. In 2006 there are nearly 9,000, and now there are less than 8,000 - and now folks are saying, "Less competition rarely, if ever, benefits the consumer." You can read the entire report here.

Sometimes banks grow weary of being sued by the U.S. Government, and decide to sue back. In this morning's case, BB&T, Wells, and a few others are suing the government over tax credits. I knew that I should have been a lawyer.

KB Home announced earnings for the 3rd quarter: a loss of almost $10 million versus a loss of $1.4 million a year earlier. These results, for its quarter that ended in August, include $1.2 million in charges for inventory impairments and land option contract abandonments, revenue down 27%, and a drop of over 30% in home deliveries (although the average sales price was up 6%).

Fortress Investment Group owns Nationstar, and it seems it is the front runner for acquiring Bank of America's correspondent channel. Critics are asking, "Given what makes up a 'correspondent channel,' what will Fortress be buying, exactly, since it seems that many in that unit have either left or are actively seeking employment elsewhere?"

As it continues to shed assets and manpower, BofA has reached an agreement to sell approximately $880 million of commercial mortgages at a discount of 20% to 25% off the face value. The buyer is a joint venture of Square Mile Capital Management LLC, Invesco Ltd. and a fund managed by Canyon Capital Realty Advisors LLC. The deal, which includes a mix of performing and nonperforming loans tied to 32 properties, ranks among the biggest commercial mortgage portfolio sales this year.

Bank closings picked up on Friday, with the Bank of the Commonwealth (VA) going to Southern Bank and Trust Company (here in the Carolinas), and out in California Citizens Bank of Northern California going to Tri Counties Bank. These are government-sponsored closures, but we've all heard of "too big to fail," but what about "too big to merge?" The Independent Community Bankers of America asked federal regulators to launch a moratorium on bank mergers and acquisitions involving financial firms with $100 billion or more in assets. (This would put a crimp into the Capital One-ING Direct USA deal temporarily.) Community bankers believe that new mergers and acquisitions are adding risk to an already shaky financial system while concentrating power in larger institutions that effectively cut into the market share and opportunities for smaller institutions - basically that Dodd-Frank is not having its intended consequences. Imagine that.

Huh? What's this? Regulating agencies don't have the manpower to regulate Fannie & Freddie?

Investors in mortgage-backed securities are keenly interested in the prepayment speeds of new and old securities - why would someone pay a 3 point premium for a loan that is going to pay off in 4 months? Analysts expect that prepayment speeds across the various non-agency sectors should increase as mortgage rates continue to go lower. In particular, fixed-rate and longer resetting prime mortgages should be the most responsive to the lower rate environment as a relatively higher percentage of borrowers are "refinance-eligible" in those sectors. In addition, some jumbo prime borrowers will have a significant refinance incentive for the first time as the mortgage rate reached historically low levels, and these borrowers should be most responsive to lower mortgage rates. Some borrowers have tried to fund high-balance loans prior to the 10/1 loan limit date, and others are attracted to the overall level of jumbo rates with a 4% handle, low 3's for a 5/1 ARM. Since closing costs have increased, most now assume that a borrower currently needs at least a 75 basis point rate incentive to refinance - this population has more than doubled since the first quarter. Approximately 10% of outstanding prime fixed and longer-reset hybrid borrowers have become newly refinanceable from a rate perspective, and are refi-eligible according to CLTV and payment history criteria. One should expect that these borrowers should be most responsive to the lower rate environment, even with tighter underwriting (especially on 5/1 products).

The latest move by the Fed - to reinvest mortgage payoffs back into mortgages - has analysts racing back to their calculators. (I still have my 25-yr old 12-C!) In recent years the Fed has mostly been interested in owning conventional securities (Fannie & Freddie) and thus investors see less demand for Ginnie Mae production backed by FHA & VA loans. But a good percentage of GNMA's come from new home sales, which show few signs of gearing up. So if the supply is poor, and demand holds steady, the prices should do just fine. And overall, even though the 10-yr yield has really dropped, and mortgage rates have as well, the MBA refinancing index has consistently surprised to the downside - folks just aren't rushing in to refi.

Barclays notes that, "While the main reasons for this benign refinancing activity have been well documented, notably, rep and warranty risk, tight underwriting standards, declining HPA, friction in the HARP program, and the absence of alternative credit in the non-agency market, two new factors have emerged, which we believe play an integral role in explaining the reduced refinancing activity. First, borrowers refinancing their home seem to be getting a higher mortgage rate than those purchasing a home. This behavior has been observed for most originators and is the most pronounced for the largest originators including Bank of America, JPMorgan Chase, and Wells Fargo. Second, even though primary-secondary spreads seem tighter this time, originator margins are at their widest, suggesting that originator capacity is still limited, and that borrowers are not obtaining as low a mortgage rate as they would if capacity were not an issue."

For the first time in seven quarters the level of outstanding commercial/multifamily mortgage debt grew in the U.S according to information released by the MBA.  The Association said that total debt rose $3.5 billion (0.1%) in the second quarter of 2011 to a total of $2.4 trillion.  The last time total debt increased was in the third quarter of 2009. Anyone who loves big numbers should check it out.

While we're on the MBA, it and MERSCORP (parent of MERS) announced that management of the Mortgage Industry Standards Maintenance Organization (MISMO) will transfer to MBA on December 1. Folks I spoke with believe that it is for the best at this point, and the rationale makes sense.

Franklin American spread the word to clients that, "Mandatory Trades for USDA products are now available...USDA loans cannot be comingled with other loan products in a trade, but aside from that all other mandatory delivery rules and policies apply."

With the low rates come renewed updates on renegotiation policies. Stearns notes, "Float downs must lower the interest rate to the Borrower and Compensation cannot be increased regardless of whether the Broker is keeping it or passing it along to the Borrower. Loans may be relocked for a one-time maximum of 14 days. Loans must be ready to have docs drawn. Pricing will be renegotiated based on the original lock term and will use the pricing for that lock term with the following adjustments (to lower the rate .125% to .25% the charge will be the original lock term pricing minus .50 pt., to lower the rate .375% the charge will be the original lock term pricing minus .625 pt., to lower the rate .500% the charge will be the original lock term pricing minus .875 pt.). Any requests beyond a rate reduction cap will be handled on a case-by-case basis. Float downs are not allowed on FHA Streamlines, Jumbo, ARM or Specialty Product programs." And so on - check its bulletin for exact details and info on extensions.

Interbank's VP of Operations sent out this note to brokers on Friday: "We are incredibly behind in all team inboxes, as well as with condition uploads; Therefore, I have decided it is much more important to get the conditions uploaded as fast as possible so they can be cleared over the weekend. We have pulled the LCs off the mailboxes, and are having them help with condition uploads. The mailboxes will continue to be behind. I'm going to put a message on the portal that we are behind in our responses, if their problem is of a CRITICAL nature (i.e. is a Temporary High Balance Loan, or is a purchase with a lock expiring) that cannot wait until Monday (when we expect to be caught up), then they must contact their AE for assistance."

ClearPoint Funding introduced its, "45 for 30 for New Locked Purchase Transactions - receive a free 15 day extension on your 30 day pricing after the loan is locked.  The Fine Print: Applies to new locks only!!! Excludes all arm loans and fixed Jumbo loans.  Promotion valid through the end of October."

Citi released their periodic (every 3 or 4 weeks) four pages of DU, LP, FHA, and VA overlays. "In order to reduce the risk of the loans we purchase, Citi has credit overlays in our policy in addition to agency guidelines. The attached Credit Overlays listing provides a summary of these overlays to help you better understand them. For complete product guidelines, please refer to the Correspondent Manual."

Later this morning we'll have new home sales numbers that are expected to remain anemic in August at around 295,000 units on an annualized basis (despite record-low 30-yr mortgage rates!). New home sales have been slowing since April, but remain slightly above the August 2010 low of 278,000 units. New home sales have never really recovered from the hangover of the first-time homebuyers' tax credit.

Looking ahead for the week, as originators along the coasts rush to close high balance loans, we have some Case-Shiller numbers tomorrow along with Consumer Confidence, Durable Good on Wednesday, Jobless Claims, GDP (the 3rd look at the 2nd quarter), and Pending Home Sales Thursday, and then Personal Income, Consumption, and the Chicago PMI on Friday. In the very early going, rates are up slightly (10-yr at 1.85% versus the 1.81% at Friday's close) and MBS prices appear to be slightly worse.

When our lawn mower broke and wouldn't run, my wife kept hinting to me that I should get it fixed.  But, somehow I always had something else to take care of first, the shed, the boat, making beer... always something more important to me. Finally she thought of a clever way to make her point.

When I arrived home one day, I found her seated in the tall grass, busily snipping away with a tiny pair of sewing scissors. I watched silently for a short time and then went into the house. I was gone only a minute, and when I came out again I handed her a toothbrush. I said, "When you finish cutting the grass, you might as well sweep the driveway."
The doctors say I will walk again, but I will always have a limp.

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog takes a look at the recent news concerning REIT's, and the possible tax implications. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.